Are You Buying Properly Taxed Fuel? Here’s How You Can Know

Wednesday, April 18th, 2018

If you run a farm or other commercial business, you have probably run across red diesel fuel. Red diesel is regular fuel but dyed for tracking and recording purposes. It is not dyed because it is more efficient, but for tax reasons.

Diesel that is dyed red is marked as tax-exempt, meaning you don’t pay state or federal taxes on the fuel. This makes it cheaper than normal diesel. The red dye is used to track the diesel to ensure that it is being used for tax-exempt purposes.

What can red diesel be used for legally?

Red diesel fuel may be used as heating oil for a home and in off-road vehicles for appropriate reasons, like operating agricultural and construction machinery. Red diesel may not be used in licensed vehicles or trucks operating on public roads, although it can be used on private roads. The red diesel program is abused, with hundreds of millions of dollars a year lost in federal and state tax revenue. Therefore, tracking and enforcement of red diesel use is an important government objective.

Gas taxes pay for road improvements and maintenance. As more fuel tax revenue is lost, there is less money to repair roads, build bridges, and pave new highways. Moreover, the government is also concerned about commercial truckers who use red diesel to lower prices and undercut their competition that does pay taxes. The result is that the government strictly enforces the use of red diesel fuel, and criminal penalties can be severe.

Enforcing the dyed diesel fuel program

This program was started in 1994 to encourage legal use of this fuel and is administered by the Internal Revenue Service. The red diesel program empowers state and federal investigators to check fuel that is being used by highway vehicles. If they catch someone using red diesel on public roads, the can issues tickets, levy tax penalties, and charge interest. Some inspectors will use mobile testing sites to test for red diesel.

If an inspector pulls over a vehicle, the driver is the one responsible for the tax or penalty. In general, if there is dye in your diesel, it cannot be used on a public road. Some truckers try to mix dyed and undyed diesel to hide it. However, that is also a penalty, and the presence of even a little dye is sufficient to merit punishment. Moreover, using mixed fuel doesn’t reduce the percentage of “taxed” fuel; the entire amount is subject to the penalty.

How to know your buying property taxed fuel

First, only purchase fuel from a supplier you know and trust. If the supplier is offering cut-rate prices or large instant rebates, there may be an issue. Make sure you buy fuel from a diesel supplier with a good reputation and one that will be honest with you.

Second, check the pump label. The IRS mandates that pump stations label the fuel as red dyed fuel and that it is tax-exempt. If you see this sticker on the pump, don’t use it for your public road vehicle.

Third, look for evidence of tampering on the pump station, on the labels, or receipts that are unclear. Some suppliers will try to deny responsibility by giving you a receipt that is illegible or incorrect. Make sure you double-check your receipts to confirm you are purchasing the correct type of fuel. Additionally, some suppliers will alter stickers or their pump stations to charge lower prices and stick the driver with the liability for the red diesel.

Fourth, inspect the fuel yourself. When you are pumping fuel, check its color on the “sight glass” on the hose if one is available. You can also bring a clear plastic container to deposit the fuel into to confirm if you are unsure about your supplier.

Finally, keep all your receipts. These should identify the product and indicate where and when it was purchased. If you buy red diesel for tax-exempt use, you will need to keep receipts to prove that you have followed the law. Moreover, if you purchase un-dyed fuel and plan to use it for tax-exempt purposes, you will need a written statement from the seller that it doesn’t contain dye.

Find a reliable diesel fuel supplier

If you are thinking about purchasing red diesel fuel, contact the professionals at Kendrick Oil. We offer a variety of fuels including regular and dyed diesel, gasoline, and fuel oils. If your business needs wholesale fuel or if you have any questions about our Products and Services, call us at (800) 299-3991 or Contact Us via email. We have locations in Texas, New Mexico, Oklahoma, Kansas, Colorado, and Louisiana.